Virgin Money shares surged after CYBG tentatively tabled a takeover offer which values the challenger bank at £1.6 billion and stands to deliver a major payout for Richard Branson’s Virgin Group.

Both lenders have now confirmed that CYBG, owner of the Clydesdale Bank, Yorkshire Bank and B brands, made a preliminary and conditional offer for the bank on Monday evening.

It would give 1.1297 new CYBG shares for each Virgin Money share, effectively valuing each stock at 359p each and giving the lender a market capitalisation of around £1.6 billion.

The Clydesdale Bank owner said the combination would create the “UK’s leading challenger bank offering both personal and SME customers a genuine alternative to the large incumbent banks”.

“With this further strengthened customer franchise and national reach, CYBG believes the combination would deliver increased value for shareholders and wider benefits to other stakeholders,” CYBG added.

CYBG assured that the Virgin Money brand would “play a significant role in the combined group,” with its takeover target’s Virgin Money shareholders set to own around 36.5% of the new business.

The news sent shares in Virgin Money Holdings up as much as 7.6% in morning trading, while CYBG shares rose around 0.8%.

The deal could mean a major payout for founder Sir Richard Branson whose Virgin Group holds a controlling stake in the lender.

“While there is much logic in this combination and significant potential cost savings to be made, combining two banks is never a simple process.

“The challenges of bringing together and integrating two IT systems in particular represents a significant challenge, one that will not doubt receive significant regulatory attention given the recent issues at TSB, where the migration onto Sabadell’s platform has been a disaster.”

He also added that regulators and politicians may also flag concerns that the deal combination removes a competitor from the market.